Budget mum on fuel taxes, sparks price rise talk

By IBT Staff Reporter03/01/11 AT 2:34 AM

India's budget belied expectations of cuts in fuel taxes on Monday, denying any relief to state-run oil firms but boosting chances of a planned ministerial meeting taking up the issue of raising prices soon.

The government freed petrol pricing last June. Diesel, cooking gas and kerosene rates are set by the government which partly compensates state oil firms for their losses when global crude oil prices increase.

With inflation at around 8 percent -- among the highest of the major Asian economies -- expectations were that the budget would tinker with customs and excise duties.

But a $5.2 billion subsidy bill on fuels for 2011/12, less than the $8.5 billion in the current year but which could be revised upward, was the highlight of Finance Minister Pranab Mukherjee's budget for the fuel sector.

The call for action from state oil firms was almost immediate as worries spread over global political developments across the Middle East and OPEC member Libya which are spurring world oil prices. Alongside, a two-month-old payments row over Iranian oil imports has lingered, feeding Indian worries over supplies.

But raising refined petroleum products prices has seemed politically untenable at a time when the government is struggling to tame inflation ahead of a series of key state elections this year.

Our under-recoveries (revenue loss on fuel sales) is very high, we were expecting duty cuts but nothing announced in budget speech ... something has to be done to address our concerns, said S.K. Joshi, head of finance at Bharat Petroleum Corp.

MINISTERIAL MEETING

The Reserve Bank of India (RBI) Deputy Governor Subir Gokarn hinted on Monday that the government could link diesel and cooking gas rates with international prices, even though the prime minister's top economic adviser said last week India could free diesel prices only after inflation eased to 6 percent.

Last week, Oil Minister S. Jaipal Reddy said he will ask Mukherjee to convene a meeting of a ministerial panel on fuel prices after the budget, and now that meeting could take up the issue of raising domestic petroleum product prices.

Underlining the difficulties facing the state oil firms, Finance Secretary Sushma Nath said on Monday it was difficult to estimate India's total loss on subsidised fuel sales in the next financial year due to the volatility in global prices.

State-run explorer Oil India also said it expected its subsidy payout to rise in the March quarter against the previous quarter after Monday's budget left tax structures on crude oil and products unchanged.

The subsidy payout is the discount given to state-run refiners on crude oil sales.

In June 2010 India granted autonomy to oil retailers -- Indian Oil Corp, Hindustan Petroleum and Bharat Petroleum -- to fix prices of petrol but decided to keep controls on diesel, cooking gas and kerosene to rein in inflation and protect the poor

Gasoline and diesel have weights of 1.09 percent and 4.67 percent, respectively, in the wholesale price index (WPI), India's main inflation measure, and raising fuel prices has a knock-on effect as farmers and manufacturers pass costs along.

India's junior oil minister R. P. N. Singh earlier this month said state oil retailers are bearing a revenue loss of about 10 rupees/litre on diesel, about 21 rupees/litre on kerosene about 356 rupees on sale of 14.2 kg cooking gas cylinder.

In the current fiscal year ending March 31, Indian state-owned oil retailers' revenue losses on fuel sales are expected to touch 1 trillion rupees, Reddy said earlier this month, putting pressure on finances as the government compensates for a part of such losses.